The Guardian

Also linked to by the Wall Street Journal

Our system of sovereign sukuk ratings could benefit the global economy and promote better cross-cultural relations

Think of two of the most common problems highlighted in today’s news: the state of the global economy and violence at the hands of Islamists. Here’s a possible remedy to both: a sovereign sukuk rating system.

Such a rating would show which economies are sharia-compliant and hence suitable candidates for asset-backed Islamic bonds in the form of sovereign sukuks. The metrics used in such a rating would mean that countries would be judged on their default risk, as well as on how ethical (and hence how Islamic) their economies are.

My colleagues Paul Hailey, Justin Lau and I at the HEC School of Management, Paris, constructed an initial rating, assessing countries on their deficit to GDP ratio, their score on the Global Peace Index, their defence spending to GDP ratio, their score on religious freedom using the Pew Forum’s Government Restrictions Index as a proxy, their score on the Social Hostilities Index and their score on the Corruption Perceptions Index. We then excluded economies whose income from alcohol, interest-bearing finance, pornography and gambling crossed particular thresholds and excluded countries with populations less than 100,000, since there would be few physical assets to finance. We also excluded economies for which we did not find sufficient information. Using these metrics, we found 35 economies to be sharia compliant. Ironically, not one was an Islamic state. The top 10 economies were Norway, New Zealand, Sweden, Finland, Uruguay, Estonia, Costa Rica, the Netherlands, Slovenia and Austria.

Were an international body of Islamist jurists, say the Islamic Financial Services Board, to come up with a similar rating with similar findings, there could be several outcomes.

First, the fact that Muslim nations fare poorly would, hopefully, give Muslim populations pause for thought. Pakistan, currently a democracy, is debating whether to repeal its blasphemy laws, which could result in the execution of a Christian woman for allegedly insulting the prophet Muhammad. The governor of Punjab, Salmaan Taseer, spoke up against the laws and was consequently assassinated by his own bodyguard. Will keeping laws in place open to abuse by a public and officials whose nation ranks low on Transparency International’s Corruption Perception Index help Pakistan surpass Norway in terms of Islamic perfection? Unlikely. Further, Pakistan’s blasphemy laws prohibit Ahmadis from calling themselves Muslims or from proselytising. Allowing for religious freedom is advocated by the Qur’an, as in verse 10:99, and so, arguably, hurt Pakistan’s sharia compliance, in addition to its score on the Pew Forum’s Government Restrictions Index. Publicly explaining why Muslim countries fall short of Muslim standards by a respected body of Islamic jurists should reduce misguided religiously motivated crimes.

Second, the ratings could give a number of Muslims prone to violence a sense of empowerment and hence diffuse their need for violence in order to be heard. If nations strive to improve their sharia compliance, Islamic values will have impacted the global economy.

Third, sharia-compliant economies, such as Uruguay and Costa Rica, which are not highly rated by traditional rating agencies, will find increased demand influenced by the sovereign sukuk ratings. Their Islamic debt, influenced by this new rating, will hopefully be cheaper than traditional debt.

Fourth (without taking into consideration the underlying asset), investment in sharia-compliant economies could help investors looking to diversify their portfolios. When comparing the return on assets of the three most sharia-compliant economies, for example, we found that they were strongly uncorrelated with, weakly uncorrelated with and weakly correlated with the Dow Jones Industrial Average over the past five years.

There are, of course, weaknesses with the concept. The sharia-compliant economies of the world are mostly highly rated by traditional sovereign rating agencies, so there would be little value-add for them in terms of increased demand for their debt. Over-levered economies that would benefit from asset-backed Islamic bonds would not be found to be sharia compliant. Nations would be required to change their legislation to allow their debt issuers to seize the public assets financed in the case of default. This would be politically difficult to sell to voting populations. The secondary market for sovereign sukuks may be difficult to establish, given that there would be asymmetric information as to the quality of the underlying asset. To some Muslims, “sharia” is a manmade contrivance, and an effort to create sharia-compliance rankings even more so. Finally, many nations would not want to entertain the notion of being held accountable to Islamic values.

But if a recognised body of jurists were able to come up with a such a rating, there certainly would be value-add for the global economy. Such a rating would be a source of shame for failing Islamic states and would give them standards to aspire to, as communities and nations. For non-Islamic states performing well on the rankings as well as on traditional ratings, the value-add would be an increased awareness of the shared values that Islam has with their culture. Mixing business with religion and politics could, with sovereign sukuk ratings therefore, be a source for better understanding between populations and for peace.